You an hardly open a newspaper today without reading about the most recent trends in “globalization.”What exactly does .this term mean~How can economics contribute to understanding the issues?

Globalization is a popular term that is used to denote an increase in economic introduction among nations. Increasing integration is seen today in the dramatic growth in the flows of good. services. and capital across national borders.

One major component of globalization is the spectacular increase In the share of national output devoted to -imports and exports’? With a continuous drop, in transportation and communication costs. along with declining tariffs and ocher barriers to trade. the share of trade In U.S. national output has more than doubled over the last half-century. Domestic producers now compete with producers from around the world in their prices and design decisions.

The Increased share of trade has been accompanied by Increased specialization i~ the production process Itself as different spats of production are “outsourced” to different countries. A typical example Is the production of Ba dolls:

The plastic and hair come from Taiwan and Japan.Assembly used to be done in those countries but has now migrated to Lower locations In Indonesia, Malaysia.and China. The molds themselves come from the United States. as do the paints used in decorating. China supplies labor and the cotton cloth used for dresses. The dolls sell for $10. of which 35 cent covers Chinese labor , 65 cent coolers foreign materials, $1 covers Hong Kong profit and transportation. and the rest is Mattel profit marketing and transportation expenses In the United States.

Evidence indicates that this process of slicing up the productive process is typical of manufacturing activities in the United States and other high-income countries. A second component of globalization Is the increasing Integration of financial markets. Financial integration is seen in the accelerated pace of lending and borrowing among nations as well as in the convergence of Interest rates among different countries. The major causes Of financial market Integral;)I have been the manhandling of restriction s on capital flows among nations. cost reductions, and innovations in financial markets, particularly the use of new kinds of financial Instruments.

Financial integration among nations has undoubtedly led to gains from trade. as nations with produce uses for capital can borrow from countries with excess saving. In the last two decades. Japan has served as the world’s major lending country. Surprisingly,the United States has been the world’s largest borrower-partly because of Its low national savings rate and partly because of the technological dynamism of its computer. telecommunication. and biotechnology industries.

Integration of goods and financial markets has produced impressive gains from trade in the form of lower prices, increased innovation. and more rapid economic growth. But these gains have been accompanied by painful side effects.

One consequence of economic Integration is the unemployment and lost profits that occur when low-cost foreign producers displace domestic production. The unemployed textile worker. the bankrupt soybean farmer -they find little solace in the fact that consumers are enjoying lower prices for food and clothing.Those who lose from increased international trade have become tireless advocates of “protectionism” in the form of tariffs and quotas on international trade.

I See Feenstra in the Further Reading section at the end of this chapter.

A second consequence comes when financial Integration triggers international financial crises. In the late 19905, problems In Thailand. Mexico, and Russia spilled over into stock and bond markets around the world.The contagion arising from small disturbances Is a direct resuIt of closely linked markets. American investors put their funds into Thailand. seeking higher returns. But these same Investors are likely to pull out their funds when they smell trouble. and that can lead to a financial crisis u countries attempt to prop up exchange rates or financial institutions in the face of a massive speculative attack.

Globalization raises many new issues for policymakers.Are the gains from trade worth the domestic costs in terms of social disruption and dislocation~ Should countries prevent Investors from moving funds In and out so rapidly that domestic markets are threatened~ Does integration lead to greater inequality Should international institutions become lenders of last resort for countries In financial difficulties These questions are on the minds of policymakers around the world who are attempting to deal with globalization.

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